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Autodesk, Inc. (NASDAQ:ADSK)

Q1 2008 Earnings Call

May 17, 2007 5:00 pm ET

Executives

Sue Pirri - VP of Investor Relations

Carl Bass - President, CEO & COO

Alfred Castino - CFO & SVP

Analysts

Jay Vleeschhouwer - Merrill Lynch

Steve Ashley - Robert W. Baird & Co.

Brent Thill - Citigroup

Phillip Alling - Bear Stearns

Daniel Cummins - Banc of America Securities

Heather Bellini - UBS

Brendan Barnicle - Pacific Crest Securities

Phil Winslow - Credit Suisse

Brian Essex - Morgan Stanley

Bard Manuilow - American Technology Research

Sasa Zorovic - Goldman Sachs

Ross Macmillan - Jefferies & Co.

Gene Munser - Piper Jaffray

David Heim - Needham & Co.

Sterling Auty - J.P. Morgan

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Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2008 Autodesk Incorporated Financial Results Conference Call. My name is Brandy and I'll be your Operator for today. At this time all participants are in a listen-only mode and we will conduct a question-and-answer session towards the end of this conference (Operator Instructions).

As a reminder this conference is being recorded for replay purposes. I would now like to turn the call over to Sue Pirri, Vice President of Investor Relations. Please proceed, ma'am.

Sue Pirri

Thank you, operator. Good afternoon, everyone and thank you for joining us as we report results for our first quarter of fiscal 2008. With me today are Carl Bass and Al Castino. Today's conference call is being broadcast live through an audio webcast. In addition a replay of the call will be available by webcast on our website at www.autodesk.com/investor.

During the course of this conference call, we will make forward-looking statements regarding future events and the future performance of the company, including information regarding restatement of our past financial statements, our guidance for the second and third fiscal quarters and for fiscal year 2008.

The factors we use to estimate our guidance for this period, our competitive position, our future business prospects and revenue growth, our market opportunities and trends for our products in various geographies. We caution you that such statements reflect our best judgment based on factors currently known to us and the actual events or results could differ materially.

Please refer to the documents we file from time-to-time with the SEC and specifically our 10-K for fiscal year 2006, our 10-Q for the quarter ended April 30th, 2006, and our periodic 8-K filings, including the 8-K filed with today's press release. These documents contain and identify important risks and other factors that may cause the actual results to differ from those contained in our forward-looking statements.

In adherence to regulation Fair Disclosure, Autodesk will provide quarterly information and forward-looking guidance in its quarterly financial results press release and this publicly announced financial results conference call. We will not provide any further guidance or update on our performance during the quarter unless we do so on a public forum.

Autodesk does not assume any obligation to update the forward-looking statements provided to reflect events that occur or circumstances that exist after the date on which they were made.

During the call, we'll discuss non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with Generally Accepted Accounting Principles, a reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures will be provided on this conference call and is made available on our website.

And now I'd like to turn the call over to Carl Bass.

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Carl Bass

Good afternoon, everyone. Thank you for joining us. Today Autodesk reported another quarter of strong financial performance. Quarterly revenue was a record $509 million, a 17% increase over last year. Once again, we achieved strong quarterly results on most of our key business metrics, including 3D revenue, maintenance revenue from subscriptions, and revenue from emerging economies.

Before we get into the detail of the quarter, I would like to provide an update on Autodesk voluntary review of past stock option granting practices. As indicated previously, Autodesk submitted the pre-clearance letter, related to its restatement of the financial statements for fiscal years 2003 to 2006, to the office of Chief Accountant at the Securities and Exchange Commission on May 3rd. While we cannot yet determine the exact date we will be filing our past financial statements, we believe we will be on file in the near future.

Now let's talk about the quarter. As expected we began shipping our 2008 family of products in March. This was the fifth release on our annual release cycle. All were delivered on time and with significant improvements in functionality and performance. The successful move five years ago to an annual release cycle was a significant achievement for our development teams and for Autodesk.

And our ability to continue to deliver strong releases annually is a testament to our execution capabilities. The 2008 releases, deliver important improvements, in both functionality and scalability, including both 64 bit and Vista compatibility and improved productivity for the AutoCAD family.

Customer demands for Autodesk products remain strong this quarter. Compared to last year, revenue from new seats increased 10%, revenue from new seats of 3ds Max increased 30% over the last year.

AutoCAD Mechanical had another outstanding quarter, as a result of recent improvements in ease-of-use, as well as changes in our sales and marketing strategy. AutoCAD Mechanical provides interoperability with inventor, as well as purpose build 2D design and drafting, bringing manufacturing customers significant productivity gains over horizontal AutoCAD. Revenue from new seats of AutoCAD Mechanical increased 65% over last year.

During the quarter, we implemented changes to our partner incentive programs, to continue to shift focus to selling vertical and 3D products. These new programs, which are accounted for as a reduction to revenue, drive the consisting treatment of incentives around the world by further reallocating incentives from horizontal products to vertical and 3D products.

While the revenue percentage of total incentives available has not changed, the reallocation does have the short-term effect of temporarily decreasing vertical and 3D revenue to Autodesk, while increasing 2D horizontal revenue. Over time, we expect that these programs will further increase deal focus on vertical and 3D solutions and thus increase the volumes and revenue from these products.

Revenue from our model based 3D solutions, Inventor revenue Civil 3D, increased 19% over the first quarter of last year, to $106 million or 21% of total revenue. The reallocation of amounts in our incentive programs effectively reduced our net 3D revenue per unit by approximately 10%. This reduction in unit price in Q1 was somewhat offset by 3D unit volumes, as resellers focused more effort on 3D return higher incentives.

During the quarter, we shipped more than 32,000 commercial seats of our 3D products and we passed the significant 3D milestone. During the quarter, we shipped our million 3D seats, far surpassing the reach of any of our competitors.

Revenue from our Revit family of products increased 31%, over a very strong first quarter of last year. We shipped more than 14,000 commercial seats of our Revit products. Revenue from Civil 3D grew 17% over last year and we shipped nearly 7400 commercial seats.

Total revenue from our Manufacturing Solutions Division increased 26% over the first quarter of last year. This is the most comparable measure of growth to that of our closest competitor, and is nearly twice their rate of growth.

Inventor revenue increased 15% compared to last year. In total, we shipped more than 10,600 commercial seats of Inventor in the quarter. Once again, winning market share as Inventor continues to out perform the legacy solutions of our competitors in all areas of mechanical design.

To further extend our leadership in 3D for the manufacturing industry, this month, we introduced the preview release of Inventor LT, which will help customers enhance their communications with suppliers and manufacturing partners by making it easier and more affordable to create, share, and edit 3D part designs.

Inventor LT eliminates many of the headaches of moving files between different CAD Systems, so customers should realize the benefits of 3D part design and AutoCAD interoperability to get their jobs done faster and easier. Over time, we believe Inventor LT will increase adoption of 3D in our manufacturing customer base.

Emerging economies continue to show strong growth. Quarterly revenue in emerging economies increased 36% over last year representing 14% of total quarterly revenues. Revenue from our install base, that is upgrade revenue and maintenance revenue from subscriptions combined, increased 22% over the first quarter of last year to $197 million.

Subscription showed outstanding performance in the first quarter. Driven by strong attach and renewal rates, maintenance revenue from subscriptions was $125 million, an increase of 45% compared to last year.

Our subscription install base grew to 1.3 million subscribers. As expected, upgrade revenue decreased slightly compared to a particularly strong first quarter of last year. Quarterly revenue from our Media and Entertainment Segment grew 26% over the last year. Animation revenue increased 27% over last year to $32 million.

In addition to the strong growth from 3ds-Max that I already mentioned, Maya showed strong growth as well increasing 64% over the first quarter of last year. Excluding the break down of deferred revenues at the time of acquisition, Maya revenues increased 26% over the first quarter of last year.

Advanced Systems had a strong quarter, increasing revenue 25% over the first quarter of last year. Combined revenue from Flame and Inferno, our infection compositing systems, increased 60% over the last year, and revenue from Smoke, our editing and finishing system, increased 21% over the first quarter of last year.

As customers continue to transition away from proprietary high-end SGI workstations, revenue from our Linux based solutions continues to show strong growth. In fact this quarter, nearly 90% of our systems product revenue was Linux based. Overall, I'm very pleased with our performance this quarter.

Now, I'd like to turn the call over to Al for a review of our financials.

Alfred Castino

Okay, before I get started I want to remind you we are not providing EPS data today because we are in the process of restating prior years reflect additional compensation expense associated with past stock option granting practices.

While our books for prior years are open, we are also recording other minor adjustments relating to our reseller incentives and subscription program that increase revenue for fiscal year 2006 and fiscal year 2005 by approximately $50 million or $5 million respectively and decreased deferred revenues by the same amounts.

Now let's talk about the quarter. Once again, Autodesk delivered great performance. Net revenues in the quarter were $509 million, 17% higher than the last year. Each of our geographies grew substantially compared to first quarter of last year.

Revenue in America was $184 million, an increase of 8%. Revenue in the America was somewhat impacted by changes in backlog between years as well as the particularly tough compare in the first quarter of last year, which grew 39%.

EMEA revenues were $207 million, an increase of 26% as reported and 14% cost of currency. Asia Pacific increased 16% to $117 million. Revenues in Japan decreased slightly compared to last year, but increased significantly on a sequential basis consistent with historical trends.

We continue to evaluate progress we made in Japan, but believe our performance there has stabilized. Excluding Japan, revenue in Asia Pacific increased 32% compared to last year. Fluctuations in foreign currency exchange rates had an immaterial impact on revenues compared to first quarter of last year.

Before I discuss divisional financial performance I want to remind you that at the beginning of the first quarter where we organized and consolidated our product divisions to better align with our customers. We now have four divisions instead of five.

Let's look at their performance. Platform solutions and emerging businesses includes AutoCAD, AutoCAD LT, Geospatial, and other emerging businesses. Platform revenue increased 12% over the first quarter of last year to $251 million.

AutoCAD LT had a terrific quarter growing 19% over last year. AutoCAD revenue increased 10% compared to last year. AutoCAD upgrade revenue decreased again as planned.

However maintenance revenue from AutoCAD subscriptions increased 33% compared to last year. As a reminder, just over 40% of the active AutoCAD install base has moved to subscription.

Our Manufacturing Solutions division was not impacted by the reorganization. Quarterly manufacturing solutions revenue was $94 million, an increase of 26% over last year. As Carl, mentioned, AutoCAD Mechanical had another great quarter increasing revenues 30% over last year. In total, we shipped 44,700 seats to our users in the manufacturing market.

The AEC Solutions Division includes the old Building Solutions Division, our Civil design solution, as well as our collaborative product Management tools, Buzzsaw and Constructware.

AEC revenue increased 40% over last year to $100 million. Revenues from AutoCAD architecture formerly called architectural desktop were flat compared to last year. As Carl mentioned, revenues from Civil 3D and Revit increased 17% and 31% respectively compared to last year, and revenue from our collaborative product management solution Buzzsaw and Constructware increased more than 60% over last year.

Media and Entertainment revenue increased 26% over last year to $59 million. Advanced Systems revenue increased 25% compared to the first quarter of last year and animation revenue increased 27%.

Total costs and expenses increased by $21 million sequentially. Total costs and expenses include cost of license and other, cost of maintenance revenue, marketing and sales, research and development, and general and administrative.

The increase was primarily due to normal seasonal increases in employee compensation and benefits as well as spending for the annual product releases and the associated localization and other development costs. These increases were partially offset by a decrease in sales submissions.

Total cost and expenses included $3 million of legal, tax, and accountant fees related to the voluntary stock option review. Spending for total cost and expenses excludes FAS 123R stock-based compensation expenses and amortization of acquisition related intangibles.

Total cost and expenses in the quarter exclude $12 million in reimbursement to employees for tax issues arising from the voluntary stock option review.

The combination of higher revenues and expenses I just described led to slightly higher earnings than we had expected.

Interest and other income more than doubled sequentially to $10 million, benefiting from our increasing cash balances and higher interest rates and $2 million sequential increase in gains from foreign exchange hedging.

Our tax rate in the quarter was 25% on both GAAP and non-GAAP basis. Compared to the first quarter of last year, foreign currency impact was $19 million favorable on revenue and $5 million unfavorable on expenses. Compared to the fourth quarter fiscal 2007, foreign currency had an immaterial impact of both revenue and expenses.

Total deferred revenues increased $21 million sequentially. Deferred maintenance revenues from subscription increased $34 million sequentially and $110 million over the first quarter of last year. Unshipped product orders or shippable backlog were $19 million, an increase of $2 million sequentially and an increase of $10 million compared to the first quarter of last year.

Total backlog including deferred revenues and unshipped product orders increased $23 million sequentially. Channel inventory was approximately flat with fourth quarter remaining substantially below our normal range of 3 to 4 weeks.

Day’s sales outstanding were 47 days this quarter as we continue to see good business linearity. Capital Expenditures were $7 million in the quarter. Cash and investments increased $186 million sequentially to $964 million.

Cash flow from operation was stronger in the quarter and because of a stock option review we were not able to repurchase shares. This led to a higher cash balance than we normally would want to see.

We did not receive any cash from employee stock plans during the quarter.

There were approximately $231 million total shares outstanding and fully diluted shares were $244 million on a GAAP basis and $245 million on a non-GAAP basis. The non-GAAP calculation differs from GAAP because of the adoption of SFAS 123R. We're very pleased with our first quarter results.

Now I'd like to turn to guidance, because we are not yet current in our financial statements, I'm not going to provide EPS guidance nor are we providing GAAP operating margins for fiscal 2008 at this time.

As usual, our guidance for the second quarter takes into account the days foreign currency change rates including some level of buffer against future strengthening of the dollar. We're feeling good about our business around the world heading second quarter and as a result we’re raising our second quarter revenue guidance to range $520 million to $530 million.

Non-GAAP operating margins for the second quarter of fiscal 2008 are expected to be in a range of 24.5 to 25.4%. This range does not take into account SFAS 123R stock based compensation expenses for reimbursement to employees or tax issues arising from the voluntary stock option review which in total, we are currently unable to determine that the lead will be significant.

Our operating margin range also excludes amortization of acquisition related intangibles that are approximately $4 million. Second quarter operating margins include approximately $0.5 million legal tax, and accounting fees related to the voluntary stock option review.

Net revenues for the third quarter fiscal 2008, is also expected to be between $520 million to $530 million. Non-GAAP operating margins for the third quarter fiscal 2008 are expected to be in the range of 26.4 to 26.9%.

This range does not take into account SFAS 123R stock based compensation expenses, which we’re currently unable to determine but believe will be significant and amortization of acquisition related intangibles were approximately $4 million. For fiscal year 2008, net revenues are expected to be between $2.115 billion and $2.150 billion.

Non-GAAP operating margins for fiscal 2008 are expected to be in the range of 27 to 27.5%. This range does not take into account SFAS 123 stock-based compensation expenses for reimbursement to employees for tax issues arising from the voluntary stock option reviews both of which we are currently unable to determine, but believe will be significant.

Our operating margin range also excludes amortization of acquisition related intangibles for approximately $16 million. Full year operating margin ranges include for approximately $5 million in legal, tax and accounting fees related to the voluntary stock option review. We continue to expect our tax rate for all fiscal 2008 to be between 25% and 26%

Now I'll turn it back over to Carl.

Carl Bass

Thanks, Al. Before we begin taking your questions, I would like to share a few final thoughts. Autodesk had a terrific quarter. Once again, we delivered record revenue and managed our investments and spending in conjunction with our revenue growth. Autodesk growth drivers remained firmly in place.

Our 3D Solutions are increasing market awareness and penetration. Emerging markets continue to show outstanding growth. Subscription growth remains robust with up front cash payment and predictable amortization, and revenue from new seats in emerging businesses continue to be approximately two-thirds of total revenue.

Worldwide business trends are impacting our customers in real and important ways, globalization, rising energy costs, the worldwide builds and rejuvenation of buildings and infrastructure, and an increasing need to keep data digital create tremendous pressure to improve productivity and profitability while increasing innovation.

Our customers are seeking differentiation through a design. And Autodesk continues to provide solutions that deliver the competitive advantage our customers need. We've launched our 2008 family products and customer response has been terrific. Early reviews of the products are very positive and we're drawing record crowds at launch events.

In short, we are very confident about the future. We are raising our revenue guidance for the second quarter and the year to reflect that optimism.

And finally, as I said before, we are currently working with the Office of the Chief Accountant and our auditors and believe we will be able to file our financial statements in the near future. We understand that this process has been frustrating for both our employees and our shareholders and we thank you for all your patience.

Operator? We're ready for questions.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from the line of Jay Vleeschhouwer with Merrill Lynch. Please proceed.

Jay Vleeschhouwer - Merrill Lynch

Thanks, good afternoon. Carl, with respect to your higher revenue outlook for the quarter and for the remainder of the year, how do you break that down in terms of improved sales productivity per average reseller as per the incentives program versus additional capacity? Does the strong demand you've alluded to necessitate any changes in field capacity over and above the improvements and productivity you're hoping to gain?

Secondly, at the analyst meeting, you gave us a new metric, which was deals of over $100,000 and deals of over $1 million. Could you talk about how you did with either of those in the quarter?

Carl Bass

Yes, Jay. So, on the first one, as we've talked about, we're on a multi-year plan to increase channel, capability as well as capacity. Both of those are important. The demand is out there. We’ve continued to invest. We've also outlined that in many ways you can't turn on either channel capacity or capability in the short-term so it takes a fair amount of head room, advanced notice to be able to build in that kind of capability and capacity.

So what we see is some amount coming from demand but we will continue to need to make sure we add capacity and particularly capability, as we reach into those new places of analysis, visualization, simulation, all the areas we kind of outlined at Investor Day.

As your second question, while we were kind enough to provide that information at Investor Day I’d also pointed out we weren't going to do it on an ongoing basis, but Jay, just for you, I will tell you that we did have one $4 million deal in the quarter. In any way there was $4 million booking.

Jay Vleeschhouwer - Merrill Lynch

Can you talk a little bit more?

Carl Bass

Okay, we'll try to update you that on an annual basis but we really don't want to do this on a quarterly basis.

Jay Vleeschhouwer - Merrill Lynch

I Understand.

Carl Bass

I think we really did it for more for illustrated in purposes of really doing the whole narrative but our business has changed and how the customers that we're serving are changing rather than really being a business metric, we want to share every quarter.

Jay Vleeschhouwer - Merrill Lynch

Finally, with respect to the stability that you think you're seeing now in Japan, what are the pieces behind that? Is that, again, a function of some of the management changes you've had in place there over the last number of months, local demand conditions, or other variables?

Carl Bass

Well, I think we, as we pointed out, one of the signs that we were not doing as well as we thought we could is that the economy in Japan had already recovered. Demand there was good, witnessed by several of the other companies who had done well.

Not uniformly well but there was certainly other companies whose business was doing well in Japan and so we looked at it as mostly a failure of our own making, and so we made a number of changes in sales management both on the Japan level and the regional level.

We made some changes in terms of channel structure in working with our partners there, and in some ways, we just brought greater focus to it. We brought more resources from the overall corporation to understand it because while some of the issues are unique to Japan, many of the issues are things we have wrestled within other parts of the world.

Alfred Castino

The other way I'd noted stability is they are making their forecast recently, so they aren't surprising us. That tells me they have a handle on the numbers and that means they are more stable.

Jay Vleeschhouwer - Merrill Lynch

Thank you.

Operator

Your next question comes from the line of Steve Ashley with Robert Baird. Please proceed.

Steve Ashley - Robert W. Baird & Co.

Great. I was hoping we could get a little bit more color on the reallocation of incentives. You talked about it having a depressing impact on the average selling price of 3D. Can you give us a little bit more color of what's going on there and how that transition might play out?

Alfred Castino

Well, the way it works is that we're giving our resellers basically a better margin for selling 3D, so the incentives are greater for 3D, less for 2D and this is actually continuation of what we've been doing for a number of years with them. So we want them to add value in selling the higher end products and AutoCAD and LT, which is increasing fulfillment type of…

Carl Bass

Yes, I mean, the important thing to remember in this, Al is absolutely right but from an accounting point of view, which accounts for revenue is in incentive. So, accounts against revenue until as we move it away against the allocation, that's where you have the effect of depressing revenue in one category and apparently raising it in the other. In total, it's actually the same amount.

Steve Ashley - Robert W. Baird & Co.

Does that suggest that the sales and marketing expense should be reduced at that line as a percentage of revenue or not?

Carl Bass

In total, it should be the same. And I think what you'll see overtime is the allocations change this quarter, the programs themselves and we expect that there will be a one or two quarter kind of lag in terms of the behavior changing in order to catch up with that.

Steve Ashley - Robert W. Baird & Co.

Great. And just lastly, very strong AutoCAD and Platform business, was there any educational large deals as part of that?

Carl Bass

No, not particularly. This is not particularly the time of year where we see large educational deals in general, but there was nothing specifically out of the ordinary in that number.

Steve Ashley - Robert W. Baird & Co.

Great. Thank you.

Carl Bass

You're welcome.

Operator

Your next question comes from the line of Brent Thill with Citigroup. Please proceed, sir.

Brent Thill - Citigroup

Thanks, good afternoon. Carl, you mentioned 1.3 million subscribers on board now. How do you think of ultimate attach rate to your user base? How do you size up the penetration today?

Carl Bass

So, we talked about a number of numbers there. I think in the long run, we talked about the penetration to the AutoCAD base of being about% of the active install base. I think we'll see eventual numbers that had some towed out at probably double that, so 80% plus is what I think you'll eventually see.

I think the only caveat I would have to that is for the extent that we've experimented with and will continue to experiment with subscription only products in which subscription becomes mandatory. Obviously, the rates would be higher.

Brent Thill - Citigroup

Okay, and for Al, the FX benefits you saw it in fiscal Q1, that's assumed now and I think your 15% to 17% revenue guidance for the year?

Sue Pirri

No.

Alfred Castino

Our assumption foreign exchange, we haven't changed how we do this, Brent, so we always assume some conservatism in the rates as we look further out in the year, just in case the dollar goes against us. So and we don't try to predict the currency. We always let the current currency just assume a few kinds of conservative buffer the rest of the year.

Brent Thill - Citigroup

Okay. And just I know you had mentioned option review. You mentioned the near future. Do you measure that in weeks or months?

Alfred Castino

I am sorry; I didn't catch your question.

Brent Thill - Citigroup

In terms of the timing of the options review you said in the near future. Do you measure that in weeks or in months?

Alfred Castino

We don't control it again, but I’d certainly measure it in weeks, not months.

Brent Thill - Citigroup

Thank you.

Operator

Your next question comes from the line of Phillip Alling with Bear Stearns. Please proceed sir.

Phillip Alling - Bear Stearns

Thanks very much. I was wanting to just get a sense from you as to whether the change that you made in the incentives for your resellers, Did you get the impact this quarter that you expected or was there something unexpected in terms of the impact to the 2D and 3D net revenues that you reported?

Alfred Castino

Yeah. I think very honestly, we didn't get the change in behavior we wanted. Now, we expected it to take a while for people to really understand the program and change their behavior. But we have not seen the change that we expect and like I said, I think it will take a quarter or two before all of our partners fully digest the change and understand it, and this is not just for the principles of our partners but its for all of the salespeople because it affects all of the compensation schemes down the line.

Phillip Alling - Bear Stearns

Just as a follow-up to that, could you quantify what the positive revenue impact was on your net 2D revenues from the change in incentives because you did sort of give us visibility with respect to the negative impact on the 3D revenues?

Alfred Castino

It's probably several points of growth. It's not material for 2D, because obviously it's larger.

Phillip Alling - Bear Stearns

All right. And then just in terms of sort of what assumptions are you making with respect to the guidance that you're giving going forward? What impact there may be from the change in incentives to the resellers?

Alfred Castino

I mean, I think we see a gradual phasing in. Like I said, we think it will take a couple of quarters. I'd love to be pleasantly surprised that people react more quickly. I think as we've said, we've been laying out this program for a number of years.

And so this is just taking the trajectory we're on and increasing it a little bit so hopefully this is well understood by all our partners and it will come around quickly, but right now, we're continuing to estimate, it will take a couple quarters before it's fully baked into how people behave.

Phillip Alling - Bear Stearns

And the final housekeeping question for me, just with respect to the year-over-year impact on the recognized maintenance revenue in the quarter, from the Alias acquisition, could you let us know what that is and how much additional maintenance revenue you expect to recognize this year over last year from the Alias acquisition due to the write-down of the deferred at the time of the acquisition?

Alfred Castino

At the time of the write-down of deferred revenue a year ago it was about $4 million. Is that what you're talking about?

Sue Pirri

I think he dropped that. Alfred your next…

Carl Bass

I think we lost him.

Operator

Your next question comes from the line of Daniel Cummins of Banc of America Securities. Please proceed.

Daniel Cummins - Banc of America Securities

Thank you. Al, you may have covered this but could you tell us the contribution of the change in the foreign exchange environment with respect to the higher guidance?

Alfred Castino

With respect to the higher guidance, again, we take the current exchange rate and we assume that's going to be the rate for the rest of the year with few points consortium late in the year.

If you look at the change in the last quarter for the foreign currency, I think that the couple of penny. And if you look at where it was three months ago where it is versus where it is today, the couple of penny so it's not like that material.

Daniel Cummins - Banc of America Securities

Okay, but is it one factor in the high revenue guidance?

Alfred Castino

It is.

Daniel Cummins - Banc of America Securities

Okay.

Alfred Castino

But again, if you look at the change in the last three months, it's not really that much.

Daniel Cummins - Banc of America Securities

Okay, all right. Thank you.

Operator

Your next question comes from the line of Heather Bellini with UBS. Please proceed.

Heather Bellini - UBS

Hi, great, a couple of questions. First, Al, can you walk us through the operating margin assumptions you're using for the second quarter? I believe prior to this, you were forecasting a range slightly above at least what I have than what you currently guided too?

And then I had a question, if you could just clarify on 3D growth. You're saying it would have been 10% higher, so it would have been about $117 million this past quarter if you adjust for the change in the partner incentive?

Alfred Castino

Hang on Heather. So the operating margin guidance for next quarter, I already give that in the script, so it was for the second quarter, it is 24.5 to 25.4.

Heather Bellini - UBS

Right, which is versus 25.5 to 26.3, I think is what it was prior?

Alfred Castino

Right.

Heather Bellini - UBS

And can you just explain what the differences in the margin guidance? I might have missed it. I'm sorry.

Alfred Castino

Yeah, Heather, there are few investments that we're going to make in the second quarter. Our first quarter actually turned out higher than we expect. And we turn for making one-time investments; we do that a lot during the year. Overall that the full year numbers are still in the range we've been talking about.

Heather Bellini - UBS

Okay, and then the 3D growth?

Alfred Castino

Okay, the 3D growth, now I think it will be cautious about taking that 10% per unit and just applying that and say that 3D otherwise have been 10% higher. It's very hard for us to know for sure because there's an incentive impact upon resellers. Now there's usually a delayed reaction.

They can't immediately adapt to an incentive plan, but I have no doubt the number of them did indeed sell more 3D because of the incentives in the first quarter, they can't be measure precisely if I had to guess I'd say somewhere between 5 to 10.

Heather Bellini - UBS

Okay, because I thought Carl had said the reallocation impacted 3D revenue by 10%.

Alfred Castino

But when he said it was 10% on a unit basis, but again the purpose of it is to get the resellers to sell more units. So, that's why you can't precisely say what the impact of the change in incentive plan is.

Carl Bass

So, Heather your math is absolutely right about the 10%. But we can't find out is the motivational aspect of this and how it changed behavior. No, we don't give apples-to-apples comparison but the math is right.

Heather Bellini - UBS

Okay, so 117 would have been the right number if is it safe to…?

Carl Bass

It was identical.

Alfred Castino

Yeah, if the units don't change it all as a result of the incentive plan it would be 10% but again I don't believe that's the case. Resellers adapt to incentive plans, and they can't do it overnight but there was some reaction in Q1, no doubt about it.

Heather Bellini - UBS

So would you expect then to have lower 3D growth for the remainder of this fiscal year, reported 3D growth as a result of this and will you be providing with a way for us to somewhat reconcile to the best that you can 3D growth to kind of get it back to an apples-to-apples basis?

Alfred Castino

Yeah, It's going to be very hard to reconcile, again it's very hard to measure it how much more 3D volume we got since we changed the incentive plan. I think as we get in the latter part of the year, it's going to have its intended effect and at that point you should just measure 3D growth and not worry about the change in incentive plan.

Heather Bellini - UBS

Okay. So can you give us an idea then, what this type of growth rate for 3D, should we expect this kind of 20% type rate to change or to stay the same?

Carl Bass

You know, when we said about trading in the past it should grow more quickly than the rest of the company and we're very happy well that’s a strong unless we double the rate of rest of the company so that's what we want to get to. They won't necessarily hit that every single quarter, but that's the goal. And as the time goes on this incentive plan should help us to get there.

Heather Bellini - UBS

Yeah, no I am just trying to reconcile that with the comments at the analyst day that this should be a 30% grower this year.

Carl Bass

We'll take your comments you know, we understand the difference in making these comparisons and we'll see if we can do something by the end of next quarter that tries to clarify, this a little bit.

Heather Bellini - UBS

Okay. Thanks, Carl.

Operator

Your next question comes from the line of Brendan Barnicle with Pacific Crest Securities. Please proceed.

Brendan Barnicle - Pacific Crest Securities

Thank you. I guess following up on the same question, if it is a 117 type number or somewhere around that, that would imply something more like 32% growth, which would be more consistent with what you guys have talked about for the growth.

Is that the way we should be thinking about this and if not, is there anything particular to the quarter that would have had us at 19% growth rather than sort of the more the higher level growth we see in the last few quarters?

Alfred Castino

That's basically the answer we described, so again, if you measure the per unit, it is about 10%. It’s tough actually to say the impact on the volume, but it's somewhere between 5%, 10% impact. And that takes the number higher, probably high 20s is the right number.

Carl Bass

When you can watch with us with the behavior changes. And we will continue to provide revenue and units and watch as this goes throughout the year.

Brendan Barnicle - Pacific Crest Securities

But I guess what I'm trying to clarify is, that there is nothing else that happened in the quarter that would have had any sort of demand change or product change or anything else that would have led to a lower rate of 3D than what we've seen historically?

Carl Bass

No, Brendan, nothing outside the ordinary, who we do these comparison they are always slightly imperfect. The reason you know is the releases don't come out on the exact same date every year, the localized versions don't, I mean there is a number of small factors in there but nothing out of the ordinary.

Brendan Barnicle - Pacific Crest Securities

Great and just the converse of that, now you mentioned that 2D may be I guess negatively impacted a few points by this. We saw a pretty, we saw a big recovery in 2D growth this quarter.

Is that also somewhat overstated by this by that amount? Should we see that return back to kind of a single digit growth we were seeing?

Carl Bass

Well the overstatement in 2D would be by a couple of percent in difference, the differences are obviously the size of the denominator between 2D and 3D.

Brendan Barnicle - Pacific Crest Securities

Right, so the 2D growth it is fair to assume had at least a high double-digit type growth number to it?

Alfred Castino

I think 19% and that's not from the incentive plan. LT had a really good quarter.

Brendan Barnicle - Pacific Crest Securities

Great. Thank you very much.

Operator

Your next question comes from the line of Phil Winslow with Credit Suisse. Please proceed.

Phil Winslow - Credit Suisse

Hi, guys. Most of my questions have been answered, but I was hoping you could just focus back on the building solutions division and just give us an update on Revit and just sort of what traction that you're seeing there in the architectural vertical, obviously strong growth in Inventor just wondering if you could categorize where we are and sort of those transition over to Revit?

Carl Bass

No, so I mean, I think Revit continues to do really well. It had a slower growth in some of those numbers, but we said things like 90% growth year-over-year, we are not going to be sustainable.

I know, I think we've really hit that healthy point in the product life cycle in which we're not only being able to sell in but adoption is really strong across the world. We see a lot of momentum behind Revit.

We also see a lot of momentum behind those auxiliary products, the ancillary ones around Building systems and Revit structure which really if you remember is really the promise of this building information model, is to have the complete model of the building.

And so we're seeing strength in the other products associated with it. But we're really happy with the performance of Revit and I think everywhere I go in the world, I continue to be impressed by the awareness around Revit and either the people who have already moved or they intent to move in the short-term.

Phil Winslow - Credit Suisse

Great. Thanks, guys.

Operator

Your next question comes from the line of Brian Essex with Morgan Stanley. Please proceed.

Brian Essex - Morgan Stanley

Hi, good afternoon. I was wondering if I can get a little bit of color on performance on a gross margin level sequentially, maybe not explicitly as you may not be allowed to disclose that, but I guess by directionally whether you felt that was flat or a little bit up?

And then as a follow-up to that, baked into your guidance for the year, for expected operating margins, how much of that is related to costs associated with the legal and accounting expense for the option review? In other words, if we look at the margin expansion, you're still forecasting over the end of the year, what would the normalized rate be?

Alfred Castino

Okay, I actually quoted the number for the total option related expenses review cost in the year I believe it was $5 million.

Brian Essex - Morgan Stanley

Okay.

Alfred Castino

So that has a slight impact, but it's pretty small. In terms of the gross margins for the quarter, I can't give you the number because of the reason I can't give you all of it but what I can is that in terms of direction, gross margin improves in the quarter.

And that was primarily due to improvements in gross margin for Advanced Systems, which did a very good job in inventory controls and some other things to improve their margins this year.

Brian Essex - Morgan Stanley

Okay, great. Thank you.

Operator

Your next question comes from the line of Bard Manuilow with American Technology Research. Please proceed.

Bard Manuilow - American Technology Research

Hi, guys, can you talk about how we should think about the sustainable growth rate for maintenance going forward?

Carl Bass

Could you please repeat that?

Bard Manuilow - American Technology Research

Growth rate for maintenance going forward?

Carl Bass

I think the best thing to do with the subscription program, the easiest one, it's a lot like the maximum depth, whether the easiest way to predict tomorrow's weather is by looking at today’s.

I think because of the steady nature of the subscription business, I think one of the things to look at is just plot it out quarter-over-quarter and you'll see and we haven't seen big changes either in attached or renewal rate. And obviously, the overall number is very sensitive to both of those things, and it's been fairly steady and we've seen you know abnormal jumps.

The only time you see a little bit of difference, there's a little seasonality around Q4 in that related historically to when the releases came out in the past. So other than that, there's nothing special, but if you just plotted out and extrapolate it, I think you do, as well as we do it.

Alfred Castino

And referring at Investor Day, we capture now about 1.3 million seats. We still have a lot of seats to capture, so this is far from the end of the run. And in AutoCAD in particular, we have not captured the majority of active seats in AutoCAD. And but as people come back and buy new seats in upgrades they typically are catching so there's still lot of long way ahead of us on subscriptions.

Bard Manuilow - American Technology Research

Okay, thanks.

Operator

Your next question comes from the line of Sasa Zorovic of Goldman Sachs. Please proceed.

Sasa Zorovic - Goldman Sachs

Thank you. So you mentioned here that basically, the channel inventory at the end of the quarter was below normal range of 3 to 4 weeks. Is it back up at this point in the quarter? Could you comment on that?

Alfred Castino

Do you mean, like I miss date? I don't like to quote channel inventory during the quarter. But what I'll tell you that the channel inventory has been lien now for several years continuously and we're finding the resellers are able to do their business more efficiently with less inventory and that's good for the whole ecosystem. So it is below our three-week norm.

Sasa Zorovic - Goldman Sachs

And is it then likely to stay bit below the three-week norm then is the norm going down?

Alfred Castino

Norm is not going to go down. Somewhere around three to four weeks is about right. I don't want it to get so low that they can't meet customer needs either, but yeah, recently they have been able to keep it below the three-week norm.

Sasa Zorovic - Goldman Sachs

And then going back to the issue of a buyback that you briefly mentioned, potential buyback rather you mentioned at your Analyst Day, do you still anticipate that one sort of you're completed with the review here and restatement of the past figures there that you would be in essence taking all the excess cash and going ahead with the buyback there?

Alfred Castino

Well, I'm not ready to forecast that. What I can tell you though is, we remain committed to offset all of the employee stock program dilution. So I expect our employees will lock out a market for eight or nine months. They will go out and exercise stock options and we'll be out there offsetting that.

Now to the extent we have excess cash flow, I don't want to flying around earning, low rates and interest and it needs to find something productive to do and could be a stock buyback, but I won't predict a point in time I'm going to do that.

Sasa Zorovic - Goldman Sachs

Thank you.

Operator

Your next question comes from the line of Ross Macmillan with Jefferies. Please proceed.

Ross Macmillan - Jefferies & Co.

Yeah, thank you. So if I look at the unit volumes on several 3D Revit and Inventor commercial and I compare year-over-year, it looks like it only grew about 2%, and I'm trying to square that with your comments on the additional incentives for 3D that are only really impacting revenues.

I guess, I'm not squaring the two things. I would have thought there was some better volume throughput, if you put higher incentives in place to sell 3D products. Can you help me understand that? Thanks.

Carl Bass

Yeah, so one thing that’s hard to breakout is the mix between different geographies. So the unit is not a unit, if that makes any sense. So last year, we had a couple quarters with high unit rates in some of the emerging countries and so you can't just compare them equally and do the math around it.

But we did see a good growth rate in both unit and revenue in the developed countries and as we've talked about before, we always had more volatility in the emerging countries around both units and volumes.

Alfred Castino

And then other thing to keep in mind here is, we did grow the revenue 19% and we talked about how the per unit revenue has to go down, so it doesn’t imply in slowing business.

Ross Macmillan - Jefferies & Co.

Would you expect though that maybe it was a tough compare so the 3D unit volumes would improve from the Q1 position in terms of year-over-year growth?

Carl Bass

We're not going to forecast units going forward.

Ross Macmillan - Jefferies & Co.

Okay.

Carl Bass

I mean, I think if you look at our guidance for the rest of the year, it takes into account what we think will happen.

Ross Macmillan - Jefferies & Co.

And then just one for Al, $19 million foreign exchange benefit for revenue, which is about four points I think of growth. If I did a calculation where I looked at bookings such as revenues for change and deferred, can I apply sort of a similar impact to growth from foreign exchange, if I included the base of maintenance? Is that geographically fairly consistent with revenue?

Alfred Castino

It's pretty close. If you keep in mind though that subscription, people can typically pay a year in advance and that falls out of the income statement in the course of the year. So to try and do it that precisely is going to be tough.

Ross Macmillan - Jefferies & Co.

Sure. Okay. Thanks a lot.

Operator

Your next question comes from the line of Gene Munser of Piper Jaffray. Please proceed.

Gene Munser - Piper Jaffray

Good afternoon and congratulations. If you could look at some of the bundling opportunities, I know you talked about those at the Analyst day, I guess kind of an update on that of when we potentially could see more bundled products or is it just not going to be enough to move the needle in calendar '07? Thanks.

Carl Bass

Thanks, Gene. Like I said, in New York, you should see some activity from us in this area during the year. I don't think it will have any material impact on it, and certainly any of the guidance we give is not predicated on any of that taking shape or being a big mover, but you'll start seeing more activity around that throughout the year.

Gene Munser - Piper Jaffray

Excellent, and I probably got the answer to this question lost in all of those questions around the changes in the channel, but Al, what do you say about expectations in terms of margin improvements for, I know you've historically said 1% to 1.5% kind of per year. Is that still kind of the track?

Alfred Castino

Yeah. We are committed to modest improvements in margins year by year. And certainly as we grow over the coming five years and the compound growth rate we're talking about we get into the 30s but we're committed to modest improvements. We intend to keep growing this business and we constrain our margins in order to make growth investments.

And that continues, we think there's a lot of runway ahead of us and we'll make growth investments while we increase the margin.

Gene Munser - Piper Jaffray

Great. Thank you.

Operator

Your next question comes from the line of David Heim (ph) with Needham & Company. Please proceed.

David Heim - Needham & Co.

Hi, thanks. Carl, I just have a macro question for you. I was hoping that you could talk about sustainability and how green design is a driver. It's obviously an issue that's been in the press quite a bit these days, and I was hoping that you could give a sense of how sustainability of the driver compares to some of your other macro drivers.

Carl Bass

Yeah, I mean, as you correctly pointed out, it seems to be the most popular trend out there. You can't open a newspaper or magazine or attend a conference without, sustainability being front and center. I mean, really what it is, in terms of our business, sustainability introduces a new kind of design problem.

Historically, when people design something, the constraints surround it may be around cost, manufacturability, time to market, all of a sudden, energy consumption has entered the picture. So, let me give you just two quick examples of the context of the building, there are many, many design decisions that affect the overall energy consumption in order to heat, cool, and light a building.

What it's doing is driving people towards building these digital prototypes or 3D models, so they can better understand the energy requirements. And so as an example if I had a building and I rotated it ten degrees on the site, would that increase or decrease the amount of energy needed to heat or cool the building?

If I change the materials or change the amount of glass, those are all examples and by having the 3D model, people are able to do energy analysis in a way that was not doable before. The other place we see it increasingly is the manufacturing.

I mean, obviously in terms of things like the performance of automobiles, things like the aerodynamics or again things where you need a 3D model to better analyze that, mainly in that case in terms of the performance and the running of the vehicle but people are also very concerned with the energy cost of manufacturing as well as the energy cost of recycling and maintenance and repair and operation.

David Heim - Needham & Co.

Got it. Thanks.

Operator

Your next question comes from the line of Sterling Auty of JP Morgan. Please proceed.

Sterling Auty - J.P. Morgan

Thanks. First question is for Al. Al, is there any concern that the additional changes that you made to the prior periods, the $15 million for revenue and the deferred revenue change, is there any concern that, that might actually delay the time it will take to get current on the filings?

Alfred Castino

No. It's a minor change and the $0.12 with the books open and the best practices that you have small things like that to go ahead and change them, but no it's a minor thing. It won't delay us.

Sterling Auty - J.P. Morgan

Okay. And the second question is you made the comment that with $1.3 million seats on subscription you still have a long way to go but just for us to get a sense, can you tell us, out of the installed-base, how many of those seats now are kind of educational or maybe if you just want to bucket it together, how many of the installed seats would not be eligible or not likely to go subscription?

Alfred Castino

We don't provide exact data like that, but what I will say is that there's millions of eligible seats and we got 1.3 million that are on subscription. So there's a lot of room ahead of us.

Sue Pirri

And Sterling, the active penetration numbers that we've given you always reflects the active base. So it doesn't include any of those legacy seats.

Alfred Castino

Yes. Like that AutoCAD number we gave exactly, we said 40%, we went back and took the last three releases of AutoCAD and I actually use the base and I actually maintain that the eligible but the base actually of customers who could be attached is higher because customers are four or five leases behind losing a product at some point are probably going to upgrade or cross grade and get off subscription too. So I think they’re actually that under states our opportunity.

Sterling Auty - J.P. Morgan

Okay, and then last question is for Carl. I know Agile traditionally, quite a different area for PLM, but just any thoughts around Oracle's bid year for Agile, maybe how it shapes the PLM market going forward and your opportunity within it?

Carl Bass

Yes, so my first reaction, a long last Agile family finally sold itself. It's been for sale for so long and they found a buyer. Truth is, a little surprised by who the buyer was but one of the things to recognize about Agile, they built a very successful business and only roughly falls under this umbrella of PLM.

I mean, they were in a very specific business particularly around high-tech with the kind of components and parts that most of the mechanical CAD Systems have nothing to do with. So, narrowly speaking I don't think it changes the outlook for PLM for us or for any really of our competitors.

I mean, more broadly speaking, there's always been this question and this just heightens it of when some of the ERP vendors are going to try to come into this part of the market, engineering has always been somewhat isolated from the rest of the enterprise. So, it just makes you more curious, particularly in response to the, what Oracle's competitors will do in response to this.

From our point of view, it doesn't change anything, just to reiterate what I said in New York, our opportunity in data Management and product data Management all really starts in the engineering department. We're really working from the grassroots and solving engineers problems.

Our focus is on that part of the problem and as an adjunct to that, the connection to the enterprise whereas most of the kind of large complex expensive PLM Systems have that in reverse where that's their prime thing as connection to enterprise systems.

Sterling Auty - J.P. Morgan

Got it. Thank you.

Carl Bass

You're welcome.

Operator

(Operator Instructions)

Sue Pirri

Anything else out there?

Operator

At this time, there are no questions. Ms. Pirri you may go ahead with closing remarks.

Sue Pirri

Thank you, Operator. We thank you all for joining us for our first quarter results call and if you have any questions feel free to give me a call in the office at 415-507-6467. Have a great day.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

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